Mixed response to RBI bid for CEO pay ceiling

A Reserve Bank of India (RBI) proposal to prescribe a threshold for variable compensation for private and foreign bank chief executive officers (CEOs) and whole-time directors has evoked mixed reactions from experts and industry watchers.

According to Mr. Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, the proposals seem more like caveats than actual reforms as they lay down various conditions, depending on which bonuses get remitted or restricted.

'Everybody has talked about in parts about reforms on the need for compensating bankers for the kind of work they are doing. Here, we are talking not only about risk related to decision-making but a lot of outcome-based conditions,' said Mr. Parekh.

The RBI had said in its second quarter review of monetary policy 2009-10 that in line with the steps taken by the global community, the central bank will issue guidelines to private sector banks and foreign banks on sound compensation policy.

An analyst at a foreign brokerage said the RBI’s proposals appear only to formalize what many private sector banks have been doing at present. 'These are not a fresh set of guidelines, and I feel the central bank is only developing on what some banks already practice,' he said.

At present, private sector lenders, as well as foreign banks operating in India under either the subsidiary model or the branch model, are required to obtain regulatory approval for grant of remuneration to whole-time directors and CEOs under Section 35B of The Banking Regulation Act, 1949. The approval process involves an assessment of whether the bank’s compensation policies and practices are in accordance with guidelines.

According to Amit Tandon, managing director at proxy advisory firm Institutional Investor Advisory Services (IIAS), the argument that performance-linked bonuses increase productivity does not hold water because the person hired is being paid to perform his duties in the first place.

'Moreover, since the RBI has allowed employee stock ownership plan (ESOP) to be included as a component of variable pay and permitted joining or sign-on bonus only in the form of ESOPs, it is crucial to see how the stock options are valued,' said Mr. Tandon.

Mr. Parekh said that private banks already have a set of conditions regarding stock options. 'In private sector banks, once certain compensation is worked out, you put certain conditions to make sure that the person continues with you for a longer period and does not exercise his stock options that would go adverse to the interest of the organization.' These conditions are very common, but to impose conditions on the outcome becomes a little critical to understand, he added.